Fed seen maintaining QE pace to avert a fourth summer slump

This time, Federal Reserve policy makers are prepared for the summertime slump.

During the past three years, the Fed planned to cut accommodation early in the year only to boost it after economic growth lagged behind its forecasts. Determined not to repeat the error, the Fed will probably push on with $85 billion in monthly bond purchases through the summer, said Drew Matus, a former Federal Reserve Bank of New York economist.

“The fact they’ve been fooled multiple times by slumps in the U.S. economy means they’re going to be a little gun-shy on the exit strategy,” said Matus, deputy chief U.S. economist at UBS Securities LLC in Stamford, Connecticut.

Last week’s Labor Department report showing the economy generated just 88,000 jobs in March, the fewest in nine months, confirmed the concerns of William C. Dudley, president of the New York Fed, that the job market was weaker than it appeared. The April 5 report followed six months of payroll growth averaging 197,000.

“The recent improvement in payroll employment growth, which gets much of the attention, is out-sized relative to the growth rate of economic activity that supports it,” Dudley, vice chairman of the policy setting Federal Open Market Committee, said in a March 25 speech in New York. “We have seen this movie before. When this happened in 2011 and 2012, employment growth subsequently slowed.”

The March jobs report will probably bolster the argument of FOMC voting members Dudley, Chicago Fed President Charles Evans and Boston’s Eric Rosengren that the central bank should keep adding to record stimulus through the end of the year.

‘More Confidence’

“I’m going to have a lot more confidence if I begin to see indications that growth is well above trend and it’s going to be sustainable,” Evans said to reporters at the Chicago Fed on March 27. “Continued accommodative policy, such as continuing our asset purchase program through this year, is an appropriate response to labor-market scarring,” Rosengren said in a speech on April 5, before the Labor Department released its report.

Treasuries last week soared the most since August on bets a slowing economy will prompt the Fed to maintain bond purchases. Ten-year note yields fell 14 basis points, or 0.14 percentage point, to 1.71%, according to Bloomberg Bond Trader prices.

The Standard & Poor’s 500 Index fell less than 0.1% to 1,552.30 at 10:51 a.m. in New York as investors awaited Alcoa Inc.’s financial release to mark the beginning of the earnings season. The S&P 500 fell 1% last week, for the biggest decline so far this year, as payrolls data missed economists’ estimates.